Four at Four: Banks Get Blasted — Again

By David Gaffen

Bank Credit-Default Swap Costs

Bank

CDS Now

CDS Yesterday

Citigroup

$410,000

$345,000

Bank of America

$245,000

$212,000

Wells Fargo

$215,000

$170,000

J.P. Morgan Chase

$170,000

$133,000

Source: Phoenix Partners

The activity in the nation’s banks suggests that investors believe they are circling the drain, zombies needing only a blow to the head once and for all, or facing an imminent restructuring at the hands of the government. Once again, the market ended lower, and once again, the financial sector bore the brunt of the losses. The Dow industrials ended below its closing low of 7552.29 reached on Nov. 20, 2008, setting up the possibility that the S&P 500 is headed for a new closing low as well — though it remains a little further away from its closing nadir of 752.44. Among those hitting 52-week lows Thursday were Citigroup, regional banks Fifth Third Bancorp and BB&T Corp. and several credit-card companies, including American Express Co. And it points to, again, worries about the various efforts going on in Washington to try to stabilize the financial system, along with an emerging expectation that one way or another, the nation’s struggling banking giants will face reorganization through the auspices of the government, ultimately to be sold to other players. Citigroup fell as much as 14% Thursday to an intra-day low of $2.50, where the shares hadn’t traded since December 1991. Bank of America shares were down 14% to $3.86, just pennies shy of the 52-week low of $3.77 hit two weeks ago. Meanwhile, the credit-default swaps of the major banks also widened, suggesting greater fears about the ability of these companies to pay their debts (see table). Preferred securities, higher in the capital structure than common stock, also continue to sink, reflecting similar worries — that reorganization will wipe out common shareholders, reduce preferred shareholders to a speck of dust, and make the bondholders into equity holders. It should be noted, however, that some of the trading reflects upcoming options expiry Friday. “Today into tomorrow is a different scenario for banks because of expiration tomorrow. When they are down the whole month going into expiration, you have the continued leap down into expiration,” said Dave Rovelli, managing director of U.S. equity trading for Canaccord Adams. Options activity puts pressure on the underlying stocks as traders attempt to push an option to its strike price, possibly even by shorting the security — it’s not an accident, Mr. Rovelli noted, that these stocks hit a bottom on Nov. 20 and Nov. 21 of last year, just before expiration. –Donna Kardos and Geoffrey Rogow

It was, at one point, strange to suggest that one member of the euro zone would intervene to help the sagging finances of another — but that idea, similar to the bailout of the government-sponsored enterprises in the U.S., has gained currency. Expectations that stronger economies, such as Germany, would intervene to help weaker members such as Ireland and Greece helped the euro stage a strong rally after steadily fizzling against the dollar for the last few months. Germany’s finance minister, Peer Steinbrueck, said that the country would consider bailing out those countries, adding that any idea of the EU falling apart was “totally absurd.” Those words were echoed by mildly supportive remarks from Germany’s Chancellor, Angela Merkel, and European Commission President Jose Manuel Barroso. “The euro was taking it on the chin, not just on the concerns of its constituent states but on the emerging Europe states, and those comments have changed market sentiment a little bit and helped to boost it up a bit today,” says Sacha Tihanyi, currency strategist at Scotia Capital. He says, however, that the rally may not endure because of the ongoing problems in the region. The single currency could break through $1.25 and fall as far as $1.20 should more problems emerge — but $1.25 has been a relatively solid resistance point for those looking for more weakness in the euro.

In 2009, Hewlett-Packard has been one of the safer plays among the Dow stocks and in the personal computing space, but expectations that the company would weather the recessionary storms better than most were dashed with its most recent earnings report. Amid the raging turmoil of mid-November’s market meltdown, H-P was there for a bit of solace, predicting figures that, while worse than anticipated, still represented reasonably solid growth. Headed into the day’s action, the stock was down a bit more than 6%, compared with the 13.9% fall-off for the Dow. After releasing earnings Wednesday, however, the company gave up that dream, lowering its earnings view to a range of $3.76 to $3.88 a share from its expectation late last year of $3.88 to $4.04 a share. “The reduced revenue and EPS outlook could hurt HP’s relative safe haven stature in the near term,” write analysts at J.P. Morgan Chase, who admit that they were “wrong in thinking that HP’s printer supplies could hold up in the face of the deepening global downturn.” Still, J.P. Morgan maintained that but the company’s higher recurring revenues, along with other factors, could help it maintain its headcount throughout 2009. The euphoric reaction in November is counterbalanced by this selloff, and perhaps just proves that the investment community, as a whole, is steering clear of the market unless it’s for a quick trade.

The Philadelphia Fed survey of future conditions has turned upward (darker line), but some argue that this will not matter. (Source: Philadelphia FRB)

The release of the Philadelphia Fed Index once again proved unlucky for the markets, as major averages lost about 1% on a day when this regional index slumped, falling to 41.3. The survey’s index on the outlook for the future improved for the second consecutive month, however, and the Conference Board’s survey of leading economic indicators was released, and that rose for the second consecutive month. To some, this opens up the possibility that the recession may be hitting its nadir, and economic activity may begin to improve — even if “improvement” merely refers to a reduction in the pace of decline rather than a return to growth. “The LEI usually troughs, moves sideways, then begins to rise” going into the end of recession, says Robert Brusca, founder of Fact and Opinion Economics. “The behavior of the LEI is hopeful.” But not all agree. Joshua Shapiro, chief U.S. economist at MFR Inc., notes that the primary factors helping the LEI improve are the slope of the yield curve and real M2 money supply, “both of which are being driven by emergency actions designed to prevent a deflationary spiral.” But because credit is not flowing, and short-term rates are hovering close to zero, he argues that “these two segments of the LEI are unlikely to be delivering a reliable signal about near to medium term economic activity.”

Years ago, U.S. banks loaned vast amounts to various Latin Ameican countries - Argentina, Brazil, etc., and when these countries could not make the annual payments, loaned them more money plus enough to pay the interest on the whole, repeating the process year after year, keeping what was in fact money thrown down a rathole on their books as assets, supposedly good loans. This went on for years, while the CEO's collected millios in bonuses for their acuity. Can anyone remember how the government bailed them out? They were considered too big to fail, so the mess was somehow swept under the rug. How will the government prop them up this time?

2:39 pm February 20, 2009

350jb wrote :

it is remarkable that almost none of you people posting to this forum can spell:

Thanks for reading MarketBeat. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.